Banks were put under to pressure to engage in "Equal Opportunity Lending." You can't not lend to someone just because they have bad credit or because their income isn't sufficient in order to repay the loan. Everything has become "Equal Opportunity." There is no point in getting a college degree, after all, the governor of California is a former actor, foreign born, with obvious English language difficulties, and the mayor of Los Angeles is a high school dropout. The list could go on and on. Forget about hiring the brightest, the best, and the most qualified for the position. "Equal Opportunity" is the way to go. Maybe our next president will be a high school dropout and then we will have achieved "Equal Opportunity" in its truest form. No wonder the wealthy are siphoning off their wealth into offshore tax havens. They want to be able to jump ship before the Titanic "equal opportunities" itself into oblivion.

The banks were just following orders from the top: Remember all of the presidential speeches about high homeownership levels? Mr. President couldn't boast about decent wages and a high standard of living. If you want that, you have to move to countries like Norway or Sweden. 99% of political campaign contribution money comes from companies, incl. small business, so one has to keep companies happy. The small business lobby was extremely powerful. How does one make them happy? Companies want to pay the lowest wages possible, so one artifically increases the labor supply through massive immigration (push the supply curve to the right). In addition, a low Federally mandated minimum wage helps. Not auditing businesses, so that they can understate their revenues and deduct lots of personal expenses as business expenses also keeps the elite happy. Audits of those earning more than $1 million, resulted in back tax payments of $198,000 annually. Contrast this with the average worker's annual salary of $41,000 as of 2005. The elite will not be happy if they have to pay income tax on their interest income, so they need tax havens. Decades of this stuffing the coffers of the elite and elite income tax evasion has resulted in a $300 billion tax revenue shortfall! Economic disparities and imbalances do matter because financial resources are limited. Economic confidence won't be restored until taxes and penalties are collected from the elite and returned to the taxpayers. This is what the G-20 Summit protestors are demanding.

Once upon a time, toxic assets used to be called liabilities. If the loans inside these packages are not likely to yield dividends (because the borrowers can not pay interest), then the packages have no commercial value to banks and no social value to the public. They were a historic costs with no future benefits, just like corporate carpets and clocks!

What ever happened to the principle of "buyer beware"? Why should NOT incompetent bankers, insurers, auto-makers and the rest of the state supported beggars be allowed to go broke, so that the profitable and prudent might prosper?

Maybe because their employees will wind up on social security? But would this really be more expensive than the massive "bad job protection schemes" that are building public debt for future generations?

The scheme is just the latest opportunity to be disappointed in the results for the same reason as previous plans; namely, there is no incentive for the root problem to be addressed. The root problem is the inability for a market of tradable assets to want to trade because of the absence of information. Last fall, I sent my representatives an outline of a mechanism that would ally the private sector in addressing these fundamental flaws, and here in this commentary, is the overview.
1. The Fed offers a VOLUNTARY, 5-year trustee arrangement to all banks. Banks identify any assets currently held on their balance sheet, and supplies ALL INFORMATION IN FILE on their characteristics, cash flows, demographics, etc. to the Fed in return for a 5-year “Trust/Custodian Receipt”. The Fed takes the assets as trustee for the bank, (IT DOES NOT PURCHASE THEM), the Fed immediately posts all of the disclosure details on a public website, and issues a trust receipt to the bank, to be held at face value on the bank’s balance sheet for a period of no more than 5 years. As an acting trustee and custodian, the Fed skims 5% of all income the assets produce, passes along 95% to the owning banks, and 100% of the payments of principal.
2. The Fed posts all submitted bids from “approved investors” (a simple approval process allows any institution, individual, partnership, etc. to be an approved investor) in real time, and simultaneously, posts all “offers” from the owning banks on the same website, therefore showing the “specialist’s book” on these assets to the entire world in real time. When bid and offer converge, a trade is automatically consummated and reported, in its full detail, real time.
3. The Fed regularly (monthly at least), updates the payment history of the assets against the originally disclosed asset characteristics, cash flows, demographics etc. keeping the performance/attributes/characteristics fresh for the market to assess their value.
4. All banks VOLUNTARILLY opting into this program and depositing assets in trust know that at the end of 5 years, all assets not sold in this electronic marketplace, and all assets they have agreed to buy through this electronic marketplace must now be exchanged for the expiring “Trust Receipts”, and placed back on their balance sheets at MARKET VALUE. (Where there are no bids and a five year history of no bids, the market value is defined to be zero). If the bank’s capital is not adequate to support the assets now on it’s balance sheet (using equity based capital accounting), the bank will be issued a “cease and desist order” and effectively loose their charter.
This brings market opportunities for investors to be able to value opaque assets now that every gory detail of the asset is public information, shields (for five years) the bank’s need to be penalized by “marking to market, model or myth” these assets against earnings and capital, and provides the bank with a five year window to shrink its balance sheet, raise capital through core earnings, the pubic markets or merger, or a combination of all of the above, and allows the Fed to act as trustee/custodian for the benefit of all, rather than as a “buyer of last resort” jeopardizing public funds for private gain.
Again, just an overview in the 5000 words permitted by The Economist

> ... banking system that stockmarkets soared on March 23rd
> when Tim Geithner, the treasury secretary, detailed his
> proposals ...

I am so sick of reporters using changes in market indexes as real-time referendums on policy changes. At best, short-term price changes reflect guesses by some investors as to how other investors will interpret imperfect information.

For example, a large block trade made for reasons completely unrelated to the Geithner plan could set off a chain reaction of selling. A "clever" analyst could then say "the market" does not like the Geithner plan. Ex-post market analysis is so stupid.

The taxpayer should not be buying things it doesn't need; assets that are worth less than what it pays for, banks that finance consumption rather than profitable business ventures, nice houses for people that can't afford to pay their mortgages, or anything else that would drain the long-term vitality of the system.

If these banks don't accept the losses for their own mistakes and write off these loans, some may use the internet to twist their arms themselves:

1. List the 6 largest banks in the US.
2. Rank them by solvency.
3. Organize a bank run on the least solvent and force it to sell its assets at distressed prices.
4. Collect deposit coverage from the FDIC.*
5. Have the withdrawn deposits transferred to accounts in the most solvent bank - which now becomes even more solvent...
6. *Write letters to congress asking the FDIC to increase its premiums and the worst remaining bank to have additional taxes placed upon it until the taxpayer is reimbursed for the FDIC's shortfall.

Property prices would bottom and the above process might need to be repeated a second time. Businesses that benefitted from excessive consumption would go bust. The dollar would fall. New jobs would be created in the US to replace what we could no longer afford to import and to export what we owe to the rest of the world. Those jobs would provide rent and mortgage payments for the houses that were sold at distressed prices. The banks that bought up those houses would become even more solvent. Credit markets would begin functioning again. The worst bank management would be gone. Moral hazard and financing of consumption by the management that remained would be replaced by financing profitable business ventures. The economy would grow again. The dollar would bounce back. China would not lose the value of their treasury investments. Japanese depositors might perform a similar operation to revive their own economy. Trillions of wasted dollars, years of government floundering, unnecessary human suffering, and further political unrest would be averted. Capitalism would work in the spirit that it was intended to work.

The US is a nation born out of a tax revolt. Don’t count on its citizens putting up with a lost decade or allowing the US government and a few corrupt banks to transmit the same to the rest of the world.

Come'on Tim, who the hell are you kidding. Fudging to buy toxic assets to create a new "bad bank" to ensure that the remaining "good bank" will survive is nothing more than a magical illusion of pure propaganda. The real story is transferring private debt to the American taxpayers and passing the financing to the rest of the world. If the rest of world were half as smart as the Chinese Central Bank of Governor, they would take their money out of dollars and invest it elsewhere, the US would be up the proverbial creek without a puddle. The shoe is now on the other foot. What goes around has come around. The US and the American public are learning how to enjoy a taste of the kind of pain you encouraged the IMF to stick it to the rest of the developing world. Things are oonly funny when it is happening to others. Ubol

Come on. Does the author actually believe the so called "stress tests" will reveal anything? Other than provide supporting evidence for the administration and the banking sector that all of the associated problems relate to liquidity, "structural deficiencies" and "systemic fragility".

The administration and the banks will use the results from these "take home tests", AKA the stress tests as the vehicle to garner 600-900 billion USD in additional capital from the congress to shore up the liquidity of these financial institutions. The dynamic being either support the banks or a total collapse will be your fault. If the process fails then the administration and the banks can just say they were operating with the bets information available and that the failure just goes to prove the premise that the problems are all systemic rather than individual or institutional. What a fine process to shield select participants from the moral hazard or personal responsibility claims.

The stress tests will reveal nothing of note and hope to convey that there is nothing to note. Meanwhile the massive effort to shield these institutions from regulatory requirements will accelerate along side the PPIP, TALF and other programs that make up the new editions of the Structured Investment Vehicle or SIV whose prior incarnation propelled Secretary Paulson's first efforts at rescue.

What underpins all of this is the hope that with the markets expected improvement after first and second quarter results reflect the massive arbitrage provided by the authorities will translate into a fresh round of debt fueled consumption and capital investment that will lift the US economy and by extension the world economy prior to the next election cycle in 2010.

However, if these efforts fail or worse, become perceived as having provided additional trillions to fund a mirage then the equation dynamics of refunding and rebalancing will face additional significant challenges.

Funny (not ha-ha!) how the US authorities are coming round to realising that unrestrained wild capitalism is its own worst enemy. Every game needs clear rules and a level playing field for all. That includes the financial markets.

Japan's "Lost Decade" was caused not so much by the banks' inability to lend as by corporate sector's eagerness to repay the loans. In late nineties the banks were no longer strapped for capital, but very eager, and worked hard to expand their loan portfolios. Only, the corporations were intent on working down their bloated balance sheet and repay their debt---in the order of tens of trillions of yen.
It took years and they dared not borrow long after their balance sheets returned to health. Domestic investment and consumption stagnated, demand short-fall was financed by huge government deficit, until export took over as the growth-driver. That was Japan's Lost Decade.
In Japan, it was in the corporate sector that borrowing binge occured which lead to
the bubble.In America, it was the household sector. Mending banking system is no doubt
of primary importance. But it does not automatically lead to recovery. What if American consumers mend their ways and do not return to the good old "borrow to consume" mode? KNAOE

Why would anyone with a double digit IQ expect the people (Geithner et al) who oversaw the making of the mess expect them to know how to fix it??? DUH!

Geithner's "plan" is NO plan! It can NOT work. Bailing out failures can never succeed in the long run. All it does is penalize the "winners" who have to pay taxes AND compete against subsidized "losers". THAT is not the free enterprise ssystem; that is socialist doctorine (which is Obama's PRIME working mode).

That may be the most sensible blog post I have ever read, literally. Your plan seems much better than any offered by Washington. There is no political bias or pandering, just a action plan to fix a complex issue.

Yet, you skip a few elements that Washington needs to consider any legislation. It must answer the question "What about the Children" forming victims who must be saved by the government. You also need to find demons to blame for problems, maybe a statement like "While middle-class families have been playing by the rules, living up to their responsibilities as neighbors and citizens, those at the commanding heights of our economy have not" like in page 5 of Obama's budget.

Maybe if you made some crazed patronizing statements like a Politician you could sneak in a fix without anyone noticing.

If banks still are hiding stuff in their balance sheets and have not yet levelled with regulators and investors, then it is high time that federal banking authorities demanded a full description and accounting and assessment of those items. If new legislation is required to establish the requirement for a full and honest and worst-case and best-case accounting to the regulators, I should think that would be doable. It should be a serious crime to conceal trouble on a balance sheet. If it isn't already, then make it so, with penalties to include claw-back of senior officer's last 5 years of compensation, forfeiture of the officer's interests in employee benefits plans, and a long prison term. You get the idea.

In our society profit should accrue to the people who take the risk. The Geithner plan places the American taxpayer at risk therefore we should reap the reward.

A Plan for the American Taxpayer.

1. The Treasury buys the 'toxic assets' midway between the bid and the offer.
2. Each of the assets is rated bases on level of risk. There are real assets out there, but no one seems to willing to examine them. (Find the paper trail.)
3. Allow the American taxpayer to purchase the assets in bond like denominations. Call them Freedom Bonds. It appears that the leverage that the FDIC is providing should give these bonds a yield between 18-35 percent.(based on certain assumptions of coupon rate, default rate, final price etc.)

There is an easier, cheaper, and faster way to solve the banking crisis which no one is talking about on Capitol Hill. If collateralized debt obligations (CDO’s) are the problem, just get rid of them! Desecuritize them! Just convert them back into the underlying loans. There are $1.4 trillion in CDO’s outstanding backed by Alt-A and subprime loans in the form of 3,700 individual securitizations of perhaps 3.7 million loans. Over 68% of the loans backing these bonds are current. Mark to market rules are forcing the banks to carry this paper on their balance sheets at 50%-80% discounts. The problem is that mark to market is a meaningless accounting fiction when there is no market. If you break up these securities and place the underlying loans back on the banks’ balance sheets, the good mortgages can be valued at 100% of face, and those behind in their payments or in default can be discounted to maybe 70% because they are still secured by the value of the homes. This would boost the value of the entire asset class from the current 20-50 cents up to 90 cents on the dollar. Restored balance sheets would enable banks to resume lending. Of course it would be a massive admin job unwinding the rats’ nests behind some of these securities, but Heaven knows there is abundant subprime and Alt-A expertise available for hire these days. Just sift through the ashes of Lehman Brothers and Bear Stearns. It is a workable plan, and therefore is unlikely to ever see the light of day.www.madhedgefundtrader.com.

To quote Barney Frank, (the man who is smart enough to oversee regulating the world's economy): "These two entities—Fannie Mae and Freddie Mac—are not facing any kind of financial crisis," said Representative Barney Frank of Massachusetts, the ranking Democrat on the Financial Services Committee. "The more people exaggerate these problems, the more pressure there is on these companies, the less we will see in terms of affordable housing."

The good news is that to this point American bank failures have not been that widespread, a few thousand more banks failed in 1981. America is used to this but Europe is just not yet accustomed to disposable banks. Welcome to the future, regulations can never ensure that every bank is well run. Badly run banks will always fail.

Those who glibly call for the nationalization of large banks --and who criticize both the Obama and Bush Administrations for not doing so -- are glueless about the risks involved. It is almost certain that any such nationalization would bring down the entire financial system and plunge the US and the world into another great depression. Think that Japan in the 90s was bad? Try 25% unemployment, a huge and ongoing contraction of GDP and the human misery that follows.

Add to that the fact that no one knows how to get out of such a cataclysmic economic death roll, and you have some idea of why neither Bush nor Obama has opted for nationalization. It's not because they lack political will or are timid; it's because they understand the awful consequences.

There is really no better way than to nationalize the zombie banks, wipe out the shareholders, fire the senior managers, and then rightsize the banks that have become "too big to fail" by focusing primarily on size and enriching managers.

What is the hurry ? Let things calm a bit. See how the housing market does this selling season. The US is not Japan in 1990, and I am tired of the ridiculous analogy. House prices in their six largest cities dropped by 2/3. They propped up their banks so that they could continue to make bad loans for years. Nothing like that is happening here. Really - we don't need Chicken Little right now.